Intercell resets strategy as staph vaccine fails

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The news for Intercell got worse today: the company confirmed a phase II/III trial of its Staphylococcus aureus vaccine V710 failed, and that partner Merck & Co has decided to hand back rights. The failure, which was not completely unexpected, prompted the company’s new chief executive to announce a “renewal strategy” and a second round of layoffs in six months.

Shares tumbled 23% to a record low of €3.99 in afternoon trade as investors wrote off the infectious diseases company - the next signficant clinical news from the company is not expected until 2014, when a phase II/III trial of a Pseudomonas aeruginosa vaccine should report. With one product already on the market and a deflated market capitalisation, the Austrian company looks like a potential takeout target, observers said today.

Harbinger

The staph vaccine failure had been presaged by suspension of enrolment due to an unspecified safety signal, an announcement that still held out the possibility the vaccine might meet efficacy endpoints (Unblinding makes future less clear for Intercell’s superbug vaccine, April 11, 2011). Shares fell by nearly one-quarter that day, and showed little sign of revival since; Intercell has now lost almost two-thirds of its market value since the beginning of 2011.

The safety signal turned out to be as bad as can be expected from a vaccine aimed at saving the lives of hospitalised patients who contract the troublesome health-care-associated bacteria strain: Intercell’s New Jersey-based partner disclosed that death and multi-organ dysfunction occurred more frequently among patients who received the vaccine than in patients who received a placebo.

The greater frequency of death and organ dysfunction was not statistically significant, but neither was clinical benefit, no question a clear signal to cut all losses on the programme. And whilst Intercell executives said a new strategic plan was already being formulated, before the failure, the event was also a trigger for the company to go into a new direction: “The aggressive growth strategy has not worked,” chief executive Thomas Lingelbach told investors today.

Strategic plans

Immediate steps include chopping 50 R&D positions, primarily in the group’s Maryland laboratories, to bring its total employee number down to 280; before its traveller’s diarrhoea patch failure in December, the company had 400 employees (Patch failure bursts Intercell's bubble, December 13, 2010). R&D operations will now be consolidated in Vienna.

Losses for 2012 are expected to total €30m-40m ($43.9m-$58.5m). With €87.7m cash at March 31, Intercell now expects to end the year with €50m.

The hope is that through downsizing, a focus on generating sales of Japanese encephalitis vaccine, Ixiaro, and commercial deals, the company can achieve a “no-cash-needed” position by the beginning of 2012. But from a longer strategic standpoint, Mr Lingelbach says in order to achieve profitability by 2014 the company needs to change a “full speed to market” mindset that has seen Intercell push products quickly through clinical development: “We need to fail earlier and cheaper.”

Failure

One can understand why. Intercell has spent €362m on R&D in the last five years.

By 2016, Ixiaro, which first hit the market in 2009, is expected to generate $98m in collaboration income from partner Novartis – which also holds a 15% stake in Intercell - and another $31m in sales to the US military. Analysts have forecast 2016 royalties of $61m from IC43, the Pseudomonas vaccine along with $2m each to its seasonal influenza vaccine and pandemic flu patch, and $1m to tuberculosis vaccine HyVac4-IC31, all of which are expected to be out-licensed.

The net present value of these R&D products is $619m, based on those forecasts, according to EvaluatePharma. This is three times higher than the company's market capitalisation at close today.

Intercell has clearly lost the faith of investors. In the short term, M&A activity would likely liven up its share price; some analysts believe Novartis might be tempted to consolidate its ownership of Ixiaro while Intercell's shares are so deflated.

But with few catalysts on the horizon, Intercell has a long climb back, even with a new strategy.

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